In Revenue Procedure 2025-5, the annual IRS Exempt Organization division's procedures for issuing determination letters, the IRS noted that former IRC Section 501(c)(3) organizations that have requested recognition of their tax exemption under a different sub-section of IRC Section 501(c) will continue to be subject to the tax on excess benefit transactions for five years, unless they are recognized by the IRS as a private foundation or governmental unit or affiliate.

IRC Section 4958 imposes an "intermediate sanctions" excise tax on transactions between certain tax-exempt organizations and disqualified persons when the economic benefit to the disqualified person exceeds the value of the consideration received by the organization for providing the benefit, including the performance of services. Private foundations, as defined in IRC Section 509(a), are excluded from the definition of tax-exempt organization for purposes of excess benefit transactions.

Revenue Procedure 2025-5 also adds four additional types of organizations that are ineligible to file Form 1023-EZ, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, to apply for recognition of exemption under IRC Section 501(c)(3). The following organizations must use the full Form 1023:

• Organizations that have previously been denied recognition of exemption by ruling or determination letter
• Organizations that have previously been determined to be ineligible to file Form 1023-EZ
• Organizations that conduct activities involving controlled substances within the meaning of Schedule I and II of the Controlled Substances Act
• Organizations that have engaged in exchanging, creating or distributing digital assets

The IRS also clarifies in Revenue Procedure 2025-5 that organizations whose tax exemptions were automatically revoked for failing to file the required Form 990-series return for three consecutive years cannot use Form 1023-EZ to apply for retroactive reinstatement of exemption from the automatic revocation date. However, those organizations may use Form 1023-EZ to apply for reinstatement of their exemptions prospectively, from the date of application. Also, organizations applying for reinstatement under section 4 of Revenue Procedure 2014-11 — reinstatement for small organizations (i.e., 990-EZ and 990-N filers) within 15 months of the automatic revocation — may use Form 1023-EZ to apply for retroactive reinstatement of exemption.

The IRS also made some slight revisions to Revenue Procedure 2025-1. For instance, Section 7.01(13) of the Revenue Procedure has been revised to clarify that submissions of private letter ruling requests (PLRs) to IRS Chief Counsel sent by electronic facsimile must be physically singed with a handwritten signature before faxing. Appendix A, Schedule of User Fees, has also been revised to reflect increased fees for 2025 PLRs, most of which have increased from $38,000 to $43,700.

Implications

Revenue Procedure 2025-5 is substantially identical to Revenue Procedure 2024-5, with the exception of minor changes and clarifications that affect specific types of exempt organizations in specific circumstances. Organizations formerly recognized as exempt under IRC Section 501(c)(3) that are now recognized as exempt under a different sub-section of the Code (pursuant to Revenue Procedure 2024-11, see Tax Alert 2024-0222) should closely monitor transactions with disqualified persons for the required five-year period, as those transactions could be excess benefit transactions that must be reported by a disqualified person on Forms 4720, 1099, and/or W-2.

The fee for requesting a PLR from IRS Chief Counsel has substantially increased over the years, including this year's $5,700 increase to $43,700 for most PLR requests. However, IRS Chief Counsel continues to entertain requests for no-charge pre-submission conferences, in which an exempt organization and its tax advisors meet with Chief Counsel attorneys to discuss a private letter ruling request and receive IRS feedback on the request before submitting it. To request a pre-submission conference, contact the IRS Office of Associate Chief Counsel (Employee Benefits, Exempt Organizations, and Employment Taxes) at (202)-317-6000.

———————————————

RELATED RESOURCES

— For more information about EY's Exempt Organization Tax Services group, visit us here.